FINANCIAL ACCOUNTING MAY 2017 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1

Q (a) Journal entries to correct the above errors. (Narrations not lequired).

(b) Suspense account duly balanced.

(c) Adjusted income statement for the year ended 31 March 2017

(d) Corrected statement 01 financial position as at 31 March 2017.

A

Solution

(a) Journal entries to correct the above errors.

Journal entries
No 1 2 3 4 5 6 7 8	Details Suspense A/c Receivables A/c Sales Ac Suspense Income Statement 69,000 × 15% Provision for depreciation (Motor vehicles) Return inwards Purchases Suspense A/c Trade receivables Suspense A/c Trade payables Discount allowed a/c Suspense A/c Cash book A/c Sales A/c	Debit 750 2,400 10,350 1,350 2,130 600 2,700 6,000	Credit 750 2,400 10,350 1,350 2,130 600 2,700 6,000

(b) Suspense account duly balanced.

Suspense a/c
Balance b/d Receivables Receivables Payables	Sh 000 1,620 750 2,130 600 5,100	Sales Disc allowed	Sh 000 2,400 2,700 5,100

(c) Adjusted income statement for the year ended 31 March 2017

Mwenda Pole Ltd Adjusted income statement for the year ended 31/3/2017
Report before adjustment Add: Purchases Less: Discount allowed Depreciation Overstated sales Return inward Corrected profit	Sh 000 (103,200 - 43,200) (2,700) (10,350) (2,400) (1,350)	Sh 000 60,000 1,350 61,350 (16,800) 44,550

(d) Corrected statement of financial position as at 31 March 2017

Mwenda pole Ltd Corrected statement of financial position as at 31 march 2017
Non-current assets Motor vehicles Fixtures & fittings Current Assets Inventory Trade receivable Cash in hand Total assets Equity and liabilities Ordinary share capital 10% preference share capital Retained earnings Non-current liabilities 20% debentures (37,200 + 6,000) Current liabilities Trade payables Bank overdraft	(69,000 - 10,350) (5,400 - 750 - 2,130) (4,440 + 6,000) (43,200 + 44,550) (2,400 + 600)	Sh 000 58,650 84,000 3,600 2,520 10,440 159,210 12,000 12,000 87,750 43,200 3,000 1,260 159,210

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QUESTION 2(a)

Q Highlight challenges that a country might face when adopting the International Financial Reporting Standards(IFRSs)

A

Solution

Adopting the International Financial Reporting Standards (IFRS) can bring several challenges to a country's financial reporting framework. Some of these challenges include:

Transition Costs: Implementing IFRS requires significant investments in training, software, and systems to align with the new reporting standards. This transition can be costly and time-consuming.
Change Management: Shifting to IFRS often necessitates changes in accounting practices and procedures. Managing the internal transition and ensuring staff are trained and aligned with the new standards can be a complex and ongoing process.
Interpretation and Compliance: IFRS standards can be complex and subject to interpretation. Ensuring accurate and consistent application of the standards across all entities can be challenging, leading to potential compliance issues.
Legal and Regulatory Framework: A country may need to revise its legal and regulatory framework to accommodate IFRS. This includes updating laws, regulations, and regulatory bodies responsible for overseeing financial reporting.
Cultural and Language Differences: Countries with diverse cultures and languages may face challenges in interpreting and applying IFRS consistently. Translation and interpretation issues can arise, impacting financial reporting accuracy.
Tax Implications: IFRS adoption may have tax consequences. Changes in accounting treatments could impact a company's tax liabilities, potentially leading to adjustments and disputes with tax authorities.
Industry-Specific Issues: Certain industries may have unique accounting practices and requirements that do not align perfectly with IFRS. Adapting IFRS to these specific industries may require additional guidance and effort.
Comparability: IFRS aims to improve financial statement comparability across countries, but differences in local regulations, interpretations, and practices can still affect comparability. This can make it challenging for investors and analysts to assess the financial performance of global companies.
Education and Training: A skilled workforce is essential for IFRS adoption. Ensuring that professionals, including accountants, auditors, and regulatory authorities, are knowledgeable about IFRS is crucial for successful implementation.
Public and Stakeholder Expectations: The shift to IFRS can create uncertainty and concerns among stakeholders, including investors and creditors. Clear communication and education are essential to manage these expectations and build confidence in the new reporting standards.
Small and Medium-Sized Enterprises (SMEs): Adapting IFRS for SMEs can be challenging, as these businesses may lack the resources and expertise to implement complex accounting standards. Countries may need to develop simplified versions of IFRS for SMEs.
Enforcement and Regulation: Ensuring that companies adhere to IFRS may require effective regulatory oversight and enforcement mechanisms. Countries may need to strengthen their regulatory bodies to enforce compliance.
Economic and Financial System Impact: The adoption of IFRS can have broader implications for a country's economic and financial system, affecting investment decisions, capital markets, and economic stability.

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QUESTION 2(b)

Q Manufacturing account and Income statement for the year ended 31 December 2016.

A

Solution

Matumizi ltd Manufacturing account for the year ended 31/12/2016
Raw materials consumed Opening stock of raw materials Add: purchases of raw materials -Carriage inwards -Purchases returns -Closing stock of raw materials Direct materials cost Direct labour Direct expenses - Royalties Prime cost Add: Factory overheads Depreciation on buildings (10% x 150,000)80% Deprecation on machinery (30% x 11,500) Electricity and water (60% x 5,000) Insurance (75% × 4,500) General Factory cost Add: Opening work in progress Less: Closing work in progress Total production cost Add: manufacturing profit (20% x 124,000) Transfer price	Sh000 3,250 62,000 250 (500) (3,750) 61,250	Sh000 61,250 27,000 5,750 94,000	Sh000 94,000 12,000 3,450 3,000 3,375 4,000 119,825 11,925 (7,750) 124,000 24,800 148,800

Closing finished goods
Production in sales in units + closing stock in units- Opening stock in units

300,000 = 246,000 + x - 0
x = 54,000 Units
Cost per unit Manufacturing = 124,000,000 / 300,000 = 413.33
Finished goods = 54,000 x 413.33 = 22,320,000

Matumizi Ltd Income statement for the year ended 31/12/2016
Sales Less: Cost of sales Opening stock of finished goods Add: transfer price Less: closing finished goods Gross profit Add: Other incomes manufacturing profit Total incomes Less: Expenses Administrative expenses Depreciation on buildings (10% x 150,000)20% Depreciation motor vehicle (25% x 20,000) Electricity and water (40% x 5,000) Insurance (25% x 4,500) Selling and distribution cost (20,500 + 1,000) Debenture interest - 15% x 50,000 Paid 3,750 Accrued 3,750 Increase in provision for the unrealised profit(20 / 120 x 22,320 - 3,375) Profit before tax Less corporate tax Less: preference dividends (10% x 100,000) Less transfer to general reserve Retained profit balance b/d Add retained profit balance b/d Less: ordinary dividends (250,000 / 25 x -375) Retailed loss balance c/d	Sh 000 20,250 148,800 (22,320) 50,000 3,000 5,000 2,000 1,125 21,500 7,500 345	Sh 000 291,000 (146,730) 144,270 24,800 169,070 (90,470) 78,600 (24,750) 53,850 (10,000) (10,000) 33,850 2,250 (37,500) (1,400)

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QUESTION 3(a)

Q Income statement and appropriation account for the year ended 30 April 2017.

A

Solution

Partners' capital account
Good will Balance c/d	Xavier Sh 000 90,000 90,000 180,000	Yvonne Sh 000 60,000 114,000 174,000	Zari Sh 000 30,000 156,000 186,000	Balance b/d Good will Revelation	Xavier Sh 000 90,000 60,000 30,000 180,000	Yvonne Sh 000 84,000 60,000 30,000 174,000	Zari Sh 000 96,000 60,000 30,000 186,000

Recognition of good will
Dr. Good will a/c 180,000

Cr. Capital a/c

X ⇒ 1 / 3 x 180,000 = 60,000
Y ⇒ 1 / 3 x 180,000 = 60,000
Z ⇒ 1 / 3 x 180,000 = 60,000

Good will writen off

Dr. Capital a/c:

Cr: Good will

X ⇒ 3 / 6 x 180,000
Y ⇒ 2 / 6 x 180,000
Z ⇒ 1 / 6 x 180,000

90,000
60,000
30,000
180,000

Revaluation reserve a/c
Balance c/d	Sh 000 90,000 90,000	Balance b/d Land & buildings	Sh 000 - 90,000 90,000

Land and Buildings a/e
Balance b/d Revaluation	Sh 000 210,000 90,000 300,000	Balance c/d	Sh 000 300,000 300,000

Capital a/c

X ⇒ 1/3 x 90,000
Y ⇒ 1/3 x 90,000
Z ⇒ 1/3 x 90,000

= 30,000
= 30,000
= 30,000

Receivable a/c
bal b/d credit sales	Sh 000 90,000 558,000 648,000	Bank Bad debts Bal c/d	Sh 000 516,000 12,000 120,000 648,000

Disposal a/c
Cost	Sh 000 180,000 180,000	Acc depreciation 180,000 x 10% x 6 Sales proceeds Profit and loss	Sh 000 108,000 30,000 42,000 180,000

Xavier, Yvonne and Zari Income statement for the year ended 30/4/2017
Sales Less: Cost of sales Opening inventory Add: purchases (330,000 + 105,000 - 120,000) Clossing stock Gross profit (50 / 150 x 558,000) Less: expenses Depreciation of plant and machinery 10% x (300,000 - 180,000 + 150,000) Operating expenses (90,000 - 30,000 + 6,000) Loss on disposal of plant Bad profit Net profit Add: Interest on debit current a/c Z- 120,000 × 10% Less: interest on current credit A/c balance X 60,000 × 10% Y 120,000 × 10% Less: interest on capital X 10% x 90,000 Z 10% x 84,000 Y 10% x 96,000 Profit to be shared Share of profit X 3/6 x 11,400=5,700 Y 2/6 x 11,400 = 3,800 Z 3/6 x 11,400 = 1,900	Sh 000 120,000 315,000 (63,000) 27,000 66,000 42,000 12,000 600 1,200 9,000 8,400 9,600	Sh 000 558,000 (372,000) 186,000 (147,000) 39,000 1,200 (1,800) (27,000) 11,400 (11,400) 0

Partners' current account
Balance b/d Interest on current a/c Drawings	X Sh 000 30,000 30,000	Y Sh 000 33,000 33,000	Z Sh 000 12,000 1,200 36,000 49,200	Balance b/d Interest on current A/c Interest on capital a/c Share of profit balance c/d Balance c/d	X Sh 000 6,000 600 9,000 5,700 8,700 30,000	Y Sh 000 12,000 1,200 8,400 3,800 7,600 33,000	Ꮓ Sh 000 - - 9,600 1,900 37,700 49,200

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QUESTION 3(b)

Q Statement ot financial position as at 30 April 2017

A

Solution

Xavier, Yvonne and Zari
Statement of financial position as at 30/4/2017

Assets
Non-current Assets
Land and buildings
Plant and machinery (300,000-180,000+150,000)-(198,000-108,000+27,000)
Current assets
Inventory
Trade Receivables
Prepaid rent

Capital and liabilities

Capital a/c:

X → 90,000
Y → 114,000
Z → 156,000

Current a/c;

X → (8,700)
Y → (7,600)
Z → (37,700)

Non-current liabilities.
10% loan
Current liabilities
Trade payables
Accrued expenses (15,000+6,000)
Cash overdraft

Sh 000

300,000
153,000

63,000
120,000
30,000
666,000

360,000

(54,000)

120,000

105,000
21,000
114,000
666,000

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QUESTION 4(a)

Q Income statement tur the vear ended 30 April 2017

A

Solution

Joyce Mello Statement of financial position as at 30 April 2017
Sales Less: Return inwards Net sales Less: Cost of sales Opening inventory Add: purchases Less: Return outwards Cost of goods available for sale Less: closing inventory Gross profit Add: other incomes Discount received Less: Expenses Increase in allowance for bad debts (5,000 - 3,500) Rates and insurance (4,000 + 500 - 200) Depreciation Buildings 5% × 50,000 Equipment 10% x 5,000 Sundry expenses Stationery Legal fees Salaries Selling and distribution cost Discount allowed Net profit for the year	Sh 000 229,950 (1,550) 50,000 170,020 (4,600) 215,420 (52,000) 1,500 4,300 2,500 500 840 1,640 280 39,000 1,600 6,300	Sh 000 228,400 (163,420) 64,980 4,600 69,580 (58,460) 11,120

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QUESTION 4(b)

Q Statement of financial position as at 30 April 2017

A

Solution

Joyce Mello Statement of financial position as at 30th April 2017
Assets Non-current Assets Buildings Equipment Current Assets Inventory Trade receivables Bank balance Cash in hand Prepaid insurance Total assets Capital and liabilities Capital (116,800 + 10,000) Add net profit Less drawings Current liabilities Trade payables Accrued rates	Sh 000 50,000 - (11,400 + 2,500) 5,000 - (1,770 + 500) (36,000 - 5,000) 126,800 11,120 (10,000)	Sh 000 36,100 2,730 52,000 31,000 32,660 13,400 200 168,090 127,920 39,670 500 168,090

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QUESTION 5(a)

Q Analyse differences between objectives of accounting for public sector" and "objectives of accounting in the private sector'

A

Solution

The objectives of accounting in the public sector and private sector reflect the different purposes and responsibilities of these sectors. While both aim to ensure responsible financial management, accountability, and transparency, the private sector primarily focuses on profit generation and value creation for its owners, while the public sector focuses on the efficient allocation of public resources to meet societal needs and objectives.

Differences between objectives of accounting for public sector" and "objectives of accounting in the private sector'

Objectives of Accounting in the Public Sector:

➫ Accountability and Transparency: Public sector accounting primarily focuses on ensuring accountability and transparency in the use of public funds and resources. The government is accountable to its citizens and taxpayers, and accounting serves as a means to demonstrate how public funds are allocated and spent.

➫ Compliance with Legal and Regulatory Framework: Public sector accounting is highly regulated and must adhere to specific legal and governmental regulations. These regulations are designed to maintain proper governance and fiscal responsibility.

➫ Budgetary Control: Public sector accounting places a strong emphasis on budgetary control to ensure that government agencies and departments stay within budget limits and follow proper allocation of funds as approved by the legislative body.

➫ Service Delivery Evaluation: In the public sector, accounting is used to assess the efficiency and effectiveness of public services. This includes evaluating how public funds are used to achieve social and economic objectives.

➫ Long-Term Sustainability: The sustainability of government services and the financial stability of the public sector are essential objectives. Accounting is used to analyze long-term financial trends and plan for future budgeting and resource allocation.

➫ Resource Allocation for Social Benefits: Public sector accounting focuses on allocating resources to maximize social benefits and promote the welfare of the general public.

Objectives of Accounting in the Private Sector:

➫ Profit Maximization: In the private sector, the primary objective of accounting is to maximize profit and create value for shareholders and owners. Profitability is a central focus, and accounting aims to provide information that helps achieve this goal.

➫ Financial Performance Assessment: Private sector accounting assesses the financial performance of a company to provide stakeholders, such as shareholders, investors, and creditors, with information about the company's financial health and its ability to generate returns on investment.

➫ Decision-Making: Accounting in the private sector assists in decision-making, including investment decisions, pricing strategies, cost control, and capital allocation. The goal is to enhance the financial position of the company.

➫ Tax Planning and Optimization: Private sector accounting is concerned with optimizing tax strategies to minimize tax liabilities legally and ensure efficient tax planning.

➫ Ownership and Control: Accounting in the private sector helps in maintaining ownership and control over the company by providing information to owners and management to make informed decisions regarding operations and investments.

➫ Risk Management: Managing financial risks is a key objective in the private sector. Accounting helps identify and mitigate financial risks to protect the interests of stakeholders.

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QUESTION 5(b)

Q Disadvantages of cash flows statements

A

Solution

While the statement of cash flows is a crucial financial statement that provides valuable insights into a company's liquidity and cash management, it also has its disadvantages and limitations. Some of the disadvantages of cash flow statements include:

Lack of Profitability Information: The statement of cash flows does not provide information about a company's profitability. It focuses solely on cash movements and may not reflect the profitability of the operations, as cash flows can be influenced by non-operating activities like financing and investing.
Potential Manipulation: Companies can manipulate their cash flow statements by timing cash flows, engaging in activities such as "window dressing" before reporting periods, or changing accounting methods. This can lead to a misleading portrayal of a company's financial health.
Limited Historical Data: Cash flow statements are typically not as informative for historical analysis as the income statement and balance sheet. They only provide a snapshot of cash movements during a specific period and may not offer the same depth of historical information.
Complexity in Some Transactions: The cash flow statement may not always capture the full financial impact of certain transactions, such as complex financial instruments, non-cash transactions, or those with deferred cash flows. This can make it challenging to understand a company's true cash position.
Subjectivity in Classification: The classification of cash flows into operating, investing, and financing activities can be subjective. Companies may have discretion in how they categorize certain cash flows, leading to potential inconsistencies in reporting.
Ignores Non-Cash Items: Cash flow statements do not consider non-cash items like depreciation and amortization, which are relevant for assessing the economic reality of a company's operations.
Overemphasis on Short-Term Liquidity: Cash flow statements primarily focus on short-term liquidity, which may not provide a comprehensive view of a company's long-term financial health or its ability to meet long-term obligations.
Difficulty in Assessing Future Performance: While cash flow statements provide insights into past cash flows, they may not be as useful for predicting a company's future performance and sustainability.
Limited Information for Investors: Cash flow statements may not offer sufficient information for investors to assess a company's strategic decisions, competitive position, or market prospects.
Lack of International Standardization: Different countries and accounting standards may have variations in how cash flow statements are prepared, which can make international comparisons challenging.

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QUESTION 5(c)

Q Describe three sources of income for a not-for-profit organisatlon.

A

Solution

Not-for-profit organizations, often referred to as nonprofits, typically generate income from various sources to support their mission and activities. The specific sources of income may vary depending on the organization's focus and goals.

Some common sources of income for nonprofits include:

Donations and Contributions: This is one of the primary sources of income for many nonprofits. It includes contributions from individuals, corporations, foundations, and other entities. Donors may provide one-time gifts or establish ongoing giving programs.
Grants: Nonprofits often receive grants from government agencies, private foundations, and charitable organizations. These grants can be for specific projects, programs, or general operating support.
Membership Dues: Membership-based nonprofits generate income from membership fees or dues paid by individuals or organizations that want to become members. These dues can be an important source of recurring revenue.
Fundraising Events: Nonprofits frequently organize fundraising events such as galas, auctions, walkathons, or charity dinners to raise funds. These events can attract donations, sponsorships, and ticket sales.
Program Service Fees: Some nonprofits offer services or programs that generate income. For example, a nonprofit providing educational workshops or healthcare services may charge fees for their services, generating earned income.
Sales of Goods and Merchandise: Nonprofits may sell products, merchandise, or services to raise funds. This can include items like books, T-shirts, artwork, or items related to their cause.
Investment Income: Nonprofits often maintain investment portfolios, and income can be generated from returns on investments, such as dividends, interest, and capital gains. This income can support their operations or be reinvested to grow the organization.
Government Contracts: Some nonprofits secure contracts with government agencies to provide specific services. These contracts can provide a steady source of income, particularly in areas like healthcare, education, and social services.
In-Kind Donations: Nonprofits may receive non-monetary donations in the form of goods, services, or volunteer labor. While not cash income, these contributions can help reduce expenses and support the organization's mission.
Endowments: Some nonprofits have established endowments or permanent funds, which are invested to generate income. The income from endowments is typically used to support the organization's long-term sustainability.
Corporate Sponsorships: Nonprofits can secure financial support from corporations in exchange for visibility and recognition. Corporate sponsorships can include financial contributions, product donations, or services.
Online Fundraising and Crowdfunding: With the rise of online platforms, nonprofits can engage in crowdfunding campaigns or online fundraising initiatives, reaching a wider audience and attracting donations from individuals across the globe.
Government Grants and Contracts: In addition to government contracts, nonprofits may receive grants from government agencies to fund specific projects or initiatives. These grants can be crucial for organizations working in areas like research, education, or community development.

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QUESTION 5(d)

Q Discuss three ethics that guide accountants in executing their duties.

A

Solution

Ethics are fundamental in the accounting profession as they guide accountants in executing their duties with integrity, objectivity, and professionalism. The following are key ethical principles that guide accountants in their roles:

Integrity: Accountants are required to maintain honesty and transparency in all their professional and business interactions. They should not engage in any deceptive, fraudulent, or dishonest activities.
Objectivity: Accountants should remain impartial and not allow conflicts of interest or undue influence to compromise their professional judgment. They must provide unbiased and independent advice.
Professional Competence and Due Care: Accountants are expected to maintain their professional knowledge and skill at a level required to ensure that their clients or employers receive competent professional service. They should perform their duties diligently, with competence, and in accordance with relevant technical and professional standards.
Confidentiality: Accountants must respect and maintain the confidentiality of information obtained during the course of their work. They should not disclose confidential information unless there is a legal or professional duty to do so.
Professional Behavior: Accountants are required to comply with relevant laws and regulations and avoid any conduct that might discredit the profession. They should act in a manner that upholds the reputation of the accounting profession.
Professional Responsibilities: Accountants have a responsibility to serve the public interest, to act in a way that will serve the public, clients, and employers with honor and dignity, and to uphold the ethical principles of the profession.
Independence: In many cases, accountants are expected to be independent, particularly when providing audit and assurance services. Independence is essential to maintain objectivity and prevent any conflicts of interest that may compromise the integrity of financial reporting.
Transparency and Full Disclosure: Accountants should ensure that financial information is presented accurately and transparently. They should not engage in practices that obscure or misrepresent the true financial position or performance of an organization.
Stewardship: Accountants have a responsibility to act as stewards of the financial interests and resources entrusted to them. They should exercise prudence and ensure the efficient and effective use of resources.
Sustainability and Environmental Responsibility: Accountants are increasingly called upon to consider the broader impact of financial decisions, including environmental and social factors. Ethical accountants should consider sustainability and the long-term consequences of financial actions.
Whistleblowing: Accountants have an ethical duty to report any unethical behavior or fraud within an organization when other avenues for addressing the issues have been exhausted. Protecting the public interest often requires whistleblowing to expose wrongdoing.
Compliance with Professional Codes and Standards: Accountants are expected to adhere to the professional codes of conduct and ethical standards established by their relevant accounting and auditing bodies, such as the International Federation of Accountants (IFAC), the American Institute of Certified Public Accountants (AICPA), or similar organizations.
Continuing Professional Development: Accountants should engage in ongoing professional development to stay current with evolving accounting and auditing standards, technological advancements, and ethical considerations.

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CPA
Foundation Leval
Financial Accounting May 2017
Suggested solutions

Solution

(a) Journal entries to correct the above errors.

(b) Suspense account duly balanced.

Solution

Solution

Solution

Solution

Solution

Solution

Solution

Differences between objectives of accounting for public sector" and "objectives of accounting in the private sector'

Objectives of Accounting in the Public Sector:

Objectives of Accounting in the Private Sector:

Solution

Solution

Some common sources of income for nonprofits include:

Solution

Comments on CPA past papers with answers: